Big volume builders have weathered the construction ’cyclone’: Metricon

The head of Australia’s largest home builder says the construction sector has come out the other side of a tough time but others say there’s more pain to come.

The head of Australia’s largest home construction company believes most of the industry’s biggest builders are through the worst of a “cyclone” that piled pressure on the sector, even as concerns remain over the potential for further collapses.

Metricon chief executive Brad Duggan said the industry, which has seen the collapse of major home builders such as Porter Davis Group, Hallbury Homes and Privium over the past couple of years, was now more on an “even keel”.

“A cyclone is a good way to describe it. There was a significant increase in demand at the same time a significant decline in resources to deliver that demand,” he said.

“But I think the volume builders have probably been through that system.”

However, while construction costs and labour shortages have settled down there are concerns there will be more high-profile building companies collapsing.

Co-founder of the Association of Professional Builders, Russ Stephens, said many of the large businesses have had “massive injections of funds” but queried whether it would be enough.

“A lot of these companies have lost so much equity and it’s hard to say if the worst is over,” he said.

“It’s fine as long as the industry remains busy but when the tide goes out you see who’s been swimming naked.”

In August last year, Metricon slashed its workforce by 9 per cent as home construction slowed with the interest rate hikes, while in July the company said it had raised prices by up to 10 per cent for clients whose original contracts had expired before construction could begin.

Metricon also had a $100m-plus injection of funds to get it through the rough patch.

Mr Duggan said Metricon’s construction starts in 2022-23 were around 4700, compared to almost 6000 in previous year.

Metricon chief executive Brad Duggan.

He said build times peaked in early 2023 with the average build for a double-storey home taking about 50 weeks, and 35 weeks for a single-storey home.

However, build times were now decreasing, and Mr Duggan said they were forecasting 25 weeks build time for a double storey and 15 weeks for a single storey in the near future.

“We’ve worked hard over the past 12 months to get us in a pretty strong and confident position for the future and we’ve reverted back to a pre-pandemic business size,” Mr Duggan said.

“We see the construction environment improving every day. Material costs have returned to a more normal state with no unprecedented price increases and labour supply is improving as well.

“We see build times getting faster and working through the challenges in the market every day we see ourselves getting back to more normalised programs. We’re in a position where we can take advantage of opportunities in the future.”

Australia’s net international migration was 375,000 in 2022-23 and there are expectations it will be 315,000 in 2023-24. Mr Duggan said it was an opportunity for Metricon’s social and affordable housing arm EveryOne Homes.

However, he said governments must do more to help the construction industry cope.

“The government’s goals are ambitious and we like them but there needs to be a lot of red tape removed and a lot of hard decisions to make sure we have the land to build on,” Mr Duggan said. “It needs to be done in a way that doesn’t result in significant pressure on build times and costs. Volume builders are critically important in the future. We’re the ones who keep the prices under a reasonable level.”

Other builders were also reporting better operating conditions. GJ Gardner Homes chief operating officer Simon Curtis said the market was stabilising with good sales volumes for the company, which builds between 600 and 700 homes each year, predominantly in NSW.

Mr Curtis said his customers, who were mainly second and third-time home buyers, were now more confident that a series of interest rate increases had ceased, and the supply chain issues and labour shortages seen over the past few years due to Covid-19 also appeared to be improving.

Master Builders Australia CEO Denita Wawn.

“Concreters and bricklayers are now looking for work which is a good sign,” he said.

Simonds Group CEO Rhett Simonds told the ASX that the higher interest rate environment and cost of living pressure would continue to impact residential customers in the near term.

“Build times and productivity continue to improve as the supply chain challenges ease and industry moves past peak construction,” he said.

Master Builders Australia chief executive Denita Wawn said the building and construction industry was the canary in the economic coal mine and activity would be dependent on the macroeconomic environment.

“Australia’s economy is navigating a challenging period. There is no denying millions of Australians and business owners are feeling the mounting pressure of rising costs of living,” she said. “However, it is not all doom and gloom, there are good reasons for believing we are overcoming the worst of the challenges as long as government policies do not hamstring these efforts.”

The Master Builders said new home building activity was declining and its estimated work began on just 173,755 new homes during 2022-23, a 16.5 per cent decline on the previous year.

“In 2023-24 we will see home starts decline by another 2.1 per cent to around 170,100, well below the 200,000 needed per year to meet population growth,” Ms Wawn said.

“However, this will likely be a bottoming out point as supply bottlenecks loosen and we return to a more desirable investment market on the demand side. We forecast new home starts will peak to just over 241,000 in 2026-27.”

Jarvis Archer, head of business restructuring and insolvency at Revive Financial, said challenges were “still very real” with the full impact of the cost-of-living crisis and the fixed-rate mortgage cliff yet to materialise.

“Builder insolvencies currently appear to be at the highest rates we’ve seen. Pre-pandemic construction insolvencies were about 20 per cent,” he said.

“In recent months that level has been above 30 per cent, or one in three, with NSW seeing construction insolvencies around 40 per cent in July and August.”

Mr Archer said he expected the construction sector to return to normal in late 2024.

“With a drop in demand, builders will be competing for fewer consumers, putting pressure on price, and projects shrinking due to affordability,” he said. “Economic factors will continue to bite. Business and personal insolvencies are expected to continue rising. The irony is there’s a building slump at the same time there’s a housing crisis. It looks like there will be political interventions to address this, but no doubt those are a way off.”